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Cashflow tips for small businesses

With seven out of ten small business owners citing cashflow problems as the main threat to their business, tips for ensuring a healthy cash flow could be the most important thing you read in the early years of business.  Particularly for start-ups, experience shows that if you can’t manage your cash flow effectively in your first couple of years, it is unlikely you will survive.

So, what does cashflow mean? It is exactly what it says on the tin, it’s when the cash flows in and out of your business bank account.  Keeping on top of your income and outgoings is vital and when developing a new business, preparing a cash flow forecast should be one of the first things you do.  Estimate when you will need to pay bills and when you will be paid by your customers and have a plan B if your income doesn’t arrive precisely when you expect it to.  Monitor that cashflow forecast regularly, it’s a working document and must be kept up to date as sales (income) and costs (outgoings) change – and they will!

Whatever type of business you run, you need to determine your breakeven point, sales beyond that point will contribute towards your company’s profitability and ability to invest for the future.  There are always unforeseen problems, so keeping some cash reserves can be a lifesaver and if that is unfeasible, then get a line of credit in place, just in case. Every business is different but there are a few key pointers that are wise to abide by:

  • Make your terms of service very clear – that includes your settlement terms.
  • If you land a big contract and are planning to offer credit terms ensure you have undertaken credit checks on the company
  • Consider asking for payment on a pro-forma invoice for new clients or big projects
  •  If completing a contract is likely to take a long time, consider asking for stage payments
  •  Keep on top of your invoicing, bill quickly and then check that those invoices are being paid on time
  •  Raise statements to arrive near the due date – late payments can cause big issues
  •  If margins allow, offer early payment discounts
  • Stay on top of stock management and tighten up your outgoings if cash flow is poor
  • Use technology to your advantage such as internet banking, emailing invoices and statements or utilising invoicing software
  • Consider leasing equipment instead of buying it

Even with all those tips, sometimes those you have trusted can let you down, occasionally through no fault of their own – what do you do when someone is not paying?

  • Establish whether they won’t pay or they can’t pay
  • Going to court should be your last resort, but you can send a letter before action for very slow payers who fall into the won’t pay category.  This is a seven-day payment request which outlines that you will be taking them to Court if they don’t settle within that time. Citizens Advice have useful guidelines on their website about what to include in a Letter before Action
  • The Late Payments Act 2013 allows you to claim late payment interest and compensation for recovery even if it is not outlined on the original invoice
  • If the amount owed is less than £10,000 you can submit a small claims court action online
  • If the amount owed is greater than £5,000 you can serve a statutory payment demand formally requesting payment within 21 days.  If this is not paid within that period, then you have grounds to present a winding-up order in Court.
  • Take advice from your accountant or solicitor